Small DA firms warned over new capital adequacy rules

Following a transitional period, from 30 June 2017 onwards firms will need to hold the greater of £20,000 or 5% of their investment business income, which could create some challenges for smaller DA firms.
 
TenetSelect has also reminded firms of the following additional criteria surrounding the figure:
 
- It must be made up of the ‘right type’ of allowable assets, eliminating most non-liquid assets such as the firm’s business premises or intangible assets such as ‘goodwill’
- It must be readily realisable, meaning it can be turned into cash within 90 days
- £20,000 is the minimum which must be maintained at all times, not just the date when firms draw up their balance sheet for regulatory reporting

Martin Greenwood, Tenet Group chief executive, commented: “We are supporting directly authorised firms to ensure they know the facts and are able to weigh up their options before the impending increase takes place.
 
“Not all assets contained within a firm’s balance sheet will be allowable under the regulatory definition. Moreover, if a firm’s PI policy includes high excesses and exclusions, their capital adequacy requirement may well have to increase. This is an area that firms need to manage very closely and they should not be misled by the £20,000 headline figure.
 
“If a firm is unable to raise or maintain the required capital, they need to consult with their accountant, PI insurer and support service provider to review their options. This is particularly pertinent in light of the FCA’s last suitability review and the speculation about a possible increased focus on smaller DA firms.
 
“There are a number of potential solutions including taking out a subordinated loan, sacrificing their own income from the business in order to increase retained profits or cancelling their permissions and becoming an appointed representative of a network. However, these all need to be discussed in conjunction with other parties.”